Achieving a Sustainable Chinese Recovery

As China puts the worst of the COVID-19 crisis behind it, reopens factories, and resumes trade with its neighbors, the country's leaders must strike the right balance between maintaining short-term growth and laying the foundations of future growth. Accelerating progress toward a low-carbon economy would be a good way to do that.

LONDON – When the 2008 global financial crisis erupted, China’s exports collapsed, threatening massive job losses. In response, China unleashed the world’s biggest-ever construction boom, pouring more concrete between 2011-13 than the United States did in the entire twentieth century.

Total investment rose from 43% to 48% of GDP during this period, and total debt from 140% in 2008 to over 200% by 2013, reaching 250% by 2017 as banks lent freely to local governments, state-owned heavy industry, and real estate developers. Construction jobs increased from 39 million to 53 million, and total urban employment continued growing at the annual pace of 12 million needed to absorb migration from rural areas. Annual GDP growth dipped only slightly, from 9.6% in 2008 to 9.2% in 2009.

Today, China faces a similar challenge. Like other Asian economies, it has contained the COVID-19 threat more effectively than Western Europe or the US; almost all its factories are open again, and April’s export figures show buoyant trade with Asian neighbors. But with Western developed economies still in partial lockdown and likely to recover only slowly, China faces huge headwinds to growth. The temptation will be to repeat a construction-led stimulus.

But the post-2008 construction boom had three adverse effects.

The first is wasted investment. In 2017, President Xi Jinping declared that, “Houses are built to be inhabited, not for speculation.” So far, however, his words have had little impact: about 15% of all apartments currently are owned as investments, often not even connected to electricity supply.

In many inland cities facing future population decline, some of these buildings will never be occupied and eventually will be torn down. Other completed infrastructure – highways and sewage systems, subways, and convention centers – similarly exceeds future requirements.

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Overbuilding financed by debt has in turn threatened the stability of the banking and shadow banking system – a problem that the People’s Bank of China (the central bank) and the banking regulator have spent the last five years trying to resolve.

Finally, the construction boom, based on carbon-intensive steel and cement production, drove China’s CO2 emissions from 7.4 gigatons in 2008 to 9.8 gigatons in 2017, making it the world’s biggest emitter. This obviously subverts the government’s vision of China as a clean economy and an “ecological civilization.”

In short, the 2009 stimulus, while necessary at the time, was financially and environmentally unsustainable. China needs a better recovery from today’s economic crisis.

Ideally, a better recovery should entail strong consumption growth and reducing China’s excessively high investment rate. But the aftermath of COVID-19 makes that difficult in the short term. It is far easier to maintain social distancing on a construction site than in a restaurant, and even when health-related restrictions are relaxed, consumers may be wary of dense convivial environments.

The latest figures show real-estate sales and construction activity rebounding far more rapidly than consumer services and retail. Infrastructure investment by local governments, financed by special-purpose bonds, is already increasing sharply.

But two major developments since 2009 should make the Chinese government wary of traditional investment stimulus. Urbanization is far more advanced, with 61% of people now living in officially designated urban areas, up from 48% in 2009, and many “rural” residents also living in towns of significant size.

Within ten years, China will reach advanced-economy urbanization levels. Unless it moderates investment in urban housing and infrastructure soon, it will be left with huge wasted assets and severe overcapacity in heavy industry. Estimates by the Energy Transitions Commission show that domestic demand for steel and cement could fall by 30% and more than 60%, respectively, over the next 30 years.

In addition, China’s population will peak in the mid-2020s, and the working-age population will likely fall by 20% between now and 2050. The number of 20-30-year-olds will decline by 22 million (12%) within just the next decade. In the short term, China still needs to ensure adequate job creation in the face of today’s cyclical downturn. But China’s medium-term challenge is to increase prosperity despite a declining workforce, which will require it to accelerate automation and productivity growth.

Chinese national and provincial leaders therefore rightly stress the need for “new” forms of infrastructure investment, with a focus on automation technology, artificial intelligence, and the rollout of 5G. But they should be realistic about how much immediate stimulus and job creation this can deliver.

Innovation means that the cost of information and communications technology (both hardware and software) continually falls relative to other goods and services. As a result, China’s plan to build nearly700,000 5G base stations in 2020 will require only about CN¥200 billion ($28.2 billion) of investment, compared with annual traditional infrastructure investment of around CN¥20 trillion. So, a 1% increase in traditional infrastructure investment would deliver as much short-term stimulus as doubling investment in 5G, but add far less value to China’s economy over the long term.

China must strike the right balance between maintaining short-term growth and laying the foundations for future growth. Accelerating progress toward a low-carbon economy would be a good way to do that. Even here, the investment needs are small compared with potentially wasted spending on real estate and traditional infrastructure. Doubling the pace of wind and solar investment would cost less than 1% of GDP.

Combined with additional investment in ultra-high-voltage (UHV) electricity transmission, power distribution networks and multiple forms of energy storage, and charging infrastructure to support electrification of road transport, the increase in spending on achieving a low-carbon economy could significantly offset the decline in export demand. As for “traditional” investment, stronger building regulations could ensure that China builds more energy-efficient cities rather than just pouring ever more concrete.

China could recover as strongly from COVID-19 as it did from the 2008 crisis, but in a far more sustainable fashion. To do so, it must resist the temptation to use its traditional stimulus tools and realize its own vision of its future economy.

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I have great admiration for Adair Turner's comments, and I recognize his expertise in questions of finance and energy, so I would phrase my sort-of disagreements tentatively.

My impression is that China is among the world's leaders in research and application of renewable energy. The continuing growth of fossil fuel consumption comes from the government's unwillingness to postpone medium-term economic growth until the arrival of the (inevitable) more sustainable sources of energy. But they know it is coming, and they are investing a lot to anticipate it.

As evidence, major cities such as Shanghai, Beijing, and Chengdu have constructed hundreds of miles of modern subway systems in the last decade, electrically powered, creating literal underground cities in their connecting corridors. In a decade, China has created 22,000 miles of efficient high-speed rail, enough to span the US eight times. Today, innovative cell-phone use is far more widespread in China than elsewhere and has already forestalled energy-inefficient infrastructure. The steel and concrete (and coal) necessary to build this infrastructure is one measure of the scale of a formerly underdeveloped country of China's size and its need to first use locally available resources.

Though the government's efforts to encourage home-ownership (especially the absence of property taxes) have resulted in speculative bubbles, given abundant need, those vacant structures are "misallocated' rather than redundant. Reforming the housing market in China is a problem akin to reforming the US stock market--too many citizens have a stake in its irrationality. The government tries, sporadically, but it needs to do more to encourage the structural transition from ownership to renting.

The Chinese are well aware of the problems of the high rate of urbanization, but they are also aware of the need to provide social services to the rural subsistence poor. Hence, efforts to decentralize functions and re-route migration from mega-cities to smaller cities. It's difficult to maintain that providing formerly unavailable services in cities (including improved housing, efficient transportation, water and sewage) is a waste of resources.

It's also difficult to say how much China's workforce is declining relative to the scale of future needs. A recent comment by the China Country Director of the World Bank placed actual current unemployment at 12-15%. Regardless, there is chronic redundant and under-employment in China, and continuing current efforts to shore-up the safety net will be necessary to make the transition to a labor-efficient sustainable economy.

All of this is not to underestimate the challenges a post-Covid-19 economy poses for China, especially to small businesses (as everywhere) and for Chinese exports (especially to the slow-recovering West). But, judging by the results of the 2009 stimulus, and despite the different magnitudes of the crises, the Chinese government is far better equipped to implement its economic policies decisively.

Adair Turner urges China to embark on a path to “low-carbon economy” whose growth should be both sustainable and ecological. The country has reopened its factories after three months of lockdown to contain the spread of Covid-19. Now that China has recovered from the pandemic and expects a stimuls package from the government to breathe life into its economy, the challenges it faces are reminiscent of the 2008 global financial crisis, when the authorities pumped enormous sums into state-owned enterprises. According to the author, China – in order to salvage the collapsed exports and avert massive job losses – “unleashed the world’s biggest-ever construction boom, pouring more concrete between 2011-13 than the United States did in the entire twentieth century.” The government invested heavily in infrastructural projects like high speed rail lines, train stations, metro systems, and airports, aiming to build 16,000 km of high speed rail by 2020, up from the initial goal of 12,000 km. It also spent billions on boosting domestic growth and maintaining high growth rates. This year’s stimulus package will have to differ from the one in 2008 in order to avoid the same mistakes made a decade ago. The old one kept the economy growing, but it came at a high price that now constrains the options of policy makers: China’s corporate debt to GDP ratio is 156.7 percent – the highest in the world. Since factories reopened last month, export figures look promising. With developed economies in the West “still in partial lockdown and likely to recover only slowly, and China facing “huge headwinds to growth,” leaders may be tempted to “repeat a construction-led stimulus.” Yet it is doubtful whether they can afford to spend this time. The author points out the three “adverse” effects of the construction boom a decade ago, which had proven to be “financially and environmentally” unsustainable. In retrospect the waste is simply mind-boggling. In 2017, Xi Jinping declared: “Houses are built to be inhabited, not for speculation.” However, “his words have had little impact: about 15% of all apartments currently are owned as investments, often not even connected to electricity supply.”There are at least 50 “ghost cities” across China, yet construction continues. In some inland cities that face “future population decline,” fancy villas, high-rise apartment blocks, lakes, parks, sprawling road networks, subways, convention centres, sewage systems, lay desolate. And “some of these buildings will never be occupied and eventually will be torn down.” The debt-fuelled “overbuilding …. has in turn threatened the stability of the banking and shadow banking system – a problem that the People’s Bank of China (the central bank) and the banking regulator have spent the last five years trying to resolve.”What can not be redressed is the ecological damage. The author points out how the construction boom, "based on carbon-intensive steel and cement production, drove China’s CO2 emissions from 7.4 gigatons in 2008 to 9.8 gigatons in 2017, making it the world’s biggest emitter. This obviously subverts the government’s vision of China as a clean economy and an 'ecological civilization.'”This should send the leadership in Beijing a message that it needs “a better recovery from today’s economic crisis” by investing in advanced technologies and clean energy. Since China faces two trends – an aging population and urbanisation – that determine the country’s growth path, the authorities focus on transitioning to a high-tech and service-driven economy, looking into “new” forms of infrastructure investment, “with a focus on automation technology, artificial intelligence, and the rollout of 5G. But they should be realistic about how much immediate stimulus and job creation this can deliver.”This is exactly what Trump seeks to prevent from happening. He fears that China would overtake the US as the world's leading power in technology with big data centres, 5G infrastructure and much more, that pose a threat to the US. This explains the ongoing tensions with China. It remains to be seen how the country recovers from the current crisis, before it can move on to lead the world.

While the Chinese PRC is trying to prove its technocratic system, based on the lessons of Karl Marx, is best for its nationalistic citizens, the US Government in consensus with Wall Street and the dominance of the Dollar will offer the dominant equation which supports the superiority of the American Economy versus the Chinese Economy.

The current test, in the Era of the Coronavirus, is proving the failure of US Private Capitalism to contain viral pandemics. The fight in America over who makes the money from a successful vaccine for the Coronavirus is paramount over the creation of the vaccine itself.

No different than the arguments over who makes the Money/Profits from 5G Internet or the HDTV invention which took years to implement because litigation by Lawyers and Judges on both sides for the institutional profit mongers they represented could not reach a consensus on which deserved the profits of implementing the current technology.

My prediction is that whichever individual scientist or his/her corporation comes up with a Coronavirus Vaccine, years of litigation will ensue as to which corporation that produces the vaccine deserves the profits from producing and selling it.

I had a friend who invented the sonic toothbrush, who patented it (14 years preclusion by law of other inventors for its profits). The result was the sonic toothbrush was not manufactured and sold by corporations for 14 years after its original inventions because none of them wanted to make patent payments to its original inventor.

This is a rational assessment of the "Real World" of business, and why it takes so long for technological inventions to be implemented for the Good of Mankind.

My prediction is that once a Coronavirus vaccine is invented, it will take 14 years (for patent expiration) before it is produced en masse and distributed to the general population, because international corporations will be in court fighting other corporations' rights to produce and distribute it due to their arguments over which deserves the profits.

Who makes the profits off a successful Coronavirus vaccine will likely delay its distribution by years, due to litigation in legal courts over which corporation deserves those profits.

"Overbuilding financed by debt has in turn threatened the stability of the banking and shadow banking system – a problem that the People’s Bank of China (the central bank) and the banking regulator have spent the last five years trying to resolve."

It is sad to see someone with real expertise succumb to such folk mythology.

China's shadow banking, as a percentage of GDP, is lower than France's, Britain's, or Japan's and in no way threatens the stability of the banking system.

Not so. I've been following China's stats for 50 years and have yet to catch them out.

If you have found a dodgy Chinese statistic, share it with us.

In the meantime, you may enjoy reading these studies of their reliability:The quality of China's GDP statistics☆ by Carsten A. HOLZ ⁎Stanford Center for International Development, Stanford University. https://www.sciencedirect.com/science/article/abs/pii/S1043951X14000753?via%3Dihub

Quality of China's Official Statistics: A Brief Review of Academic PerspectivesDmitriy PlekhanovDOI: https://doi.org/10.22439/cjas.v35i1.5400

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